It's natural to get a bit nervous in the face of new technology. For instance, I remember what I went through in the early 1990s, when I was managing editor of a magazine that was throwing out its linotype machine and bringing in digital publishing equipment. For a few months, some of my colleagues didn't know what to do without their Exacto knives and pasted-up pages. But in the end, the time the staff didn't spend on things that machines could do better, let them spend more time talking to sources, writing and piecing together the bigger picture--the things that really mattered.
That seems like a useful place to begin a discussion about the changes that technology is bringing to retirement planning. Maybe there are some advisors who will miss the experience of creating a detailed retirement plan using just their knowledge of investments, their personal judgment and an Excel spreadsheet. Maybe some advisors will think the new software programs will give prospective clients a way of doing without them in an area that is shaping up to be tremendously lucrative.
But after looking at some of these products and talking with a number of people in this part of the business, I'm here to say the truth is not nearly so gloomy. With few exceptions, the new retirement services strike me as no threat to advisors at all. On the contrary, I see them as a boon, not just to wealth managers and their clients, but also to a government under increasing pressure to keep America's retiring baby boomers solvent.
For this article, I looked at three Web-based retirement services. One, Financial Engines, has been around since 1998. The two others, Morningstar's Retirement Income Strategist and Advice America's AdvisorVision Retirement Income Edition, both debuted last fall. These are not the only retirement products available to advisors. But they are representative in their intuitive interfaces, in their step-by-step methodologies, and in their use of Monte Carlo simulations to answer the critical question: Does the prospective retiree have enough funds to last the rest of his or her life, or (in industry parlance) is there an "income gap"?
Here's a closer look at the positioning, strengths and weaknesses of each.
Morningstar Retirement Income Strategist
Morningstar has done a good job in recent years of increasing its value to advisors, and its new retirement offering continues that trend. Retirement Income Strategist (RIS) is a product of Ibbotson Associates, the asset allocation specialist that Morningstar bought for $83 million in March 2006. Chicago-based Morningstar offers RIS as an add-on to Advisor Workstation, the data and analysis tool now used by 120,000 financial service workers--primarily bank, wirehouse and independent brokers. Many of those brokers have clients in their 50s who are starting to wonder if they've set aside enough for retirement. "I've got to have an answer to this for my clients," says Dave McClellan, vice president of product development for Morningstar's Advisor Business.
To that end, RIS--available for an annual fee of $800 per seat to any firm already using Advisor Workstation in volume--starts off with a series of questions about a client's likely income in retirement. The queries cover everything from Social Security and pensions to investments and home equity. After subtracting both ordinary and extraordinary expenses, the program produces an income distribution analysis, often in as little as 20 minutes, that can show clients how confident they can be about not running out of money by age 80, 90 or 100.
"Most investors would struggle to pull all those things together," McClellan says. This gives advisors "the opportunity to provide a really valuable service."
McClellan says it's even possible that the process of figuring out if there will be an income gap--a process that inevitably identifies money held elsewhere--may allow some advisors to capture more of their clients' assets. "It's very common for investors' assets to be spread in many places," he says. "But there's a consumer mega-trend of valuing simplicity. And it's a natural next step," as the client understands how all the pieces fit together, "to consider consolidating those assets with the advisor."
And even if advisors don't get more of the clients' assets, the efficiency of being able to use technology to create a retirement plan will help in other ways. "It frees them up to spend more time with their clients, either serving them or prospecting for new business," McClellan says.
Financial Engines
There has always been a hint of arrogance surrounding Financial Engines, partly because of the pedigree of the company's founder, the Nobel laureate and Stanford professor Bill Sharpe, and partly because of the presumption of success surrounding the venture-backed company. But to spend a little time within Financial Engines' easy-to-use service is to become convinced that the company has reason for being confident, and that it has not wasted the $150 million invested in its platform.
The measure of Financial Engines' success is the acceptance it has received among Fortune 500 companies. Such businesses as Merck, Motorola and J.C. Penny have integrated Financial Engines into their 401(k) systems, giving employees the option of fine-tuning their investment choices using advice from the program. The parent corporation pays Financial Engines a platform fee of $10 to $25 per 401(k) enrollee, and Financial Engines exacts an additional 20 to 60 basis points for each employee who actually uses the service. Close to 1.5 million employees do so, answering a series of questions, receiving a recommendation back from Financial Engines, and then literally pushing a button to implement it, according to Christopher Jones, the company's chief investment officer.
Financial Engines has a much smaller number of direct subscribers, 212,000 who pay several hundred dollars a year to get investment advice on their personal retirement accounts including 401(k) plans. That direct-to-consumer offering, coupled with the fact that Financial Engines does not currently license its service to advisors, has caused some advisors to conjecture that Financial Engines is trying to put them out of business.
But CIO Jones says there's a more innocuous explanation for the lack of any advisor offering. "It's a question of scale," Jones says, referring to the return Financial Engines gets when it wins a contract at a company with 5,000 employees, versus the return it could get by selling to, say, a sole proprietorship with a couple of hundred clients. "It wouldn't be efficient for us" to market to that latter category, Jones says.
Jones also notes that the average 401(k) account--Financial Engines' sweet spot--has just $50,000 in it--not an attractive asset level to most advisors. "At the end of the day, most FAs want to work with a consumer who has more than a couple of hundred-thousand dollars," Jones says, adding, "There's always going to be a significant need for people who can understand the larger problems of personal finance--and the solutions."
Advice America's Advisor Retirement Income Edition
This is another Monte Carlo-based advice engine that some advisors have found useful, though Advice America lacks the distribution strength of Morningstar and the back-end integration capabilities of Financial Engines.
Advice America has had at least one shift in direction, necessitated by the souring of an early partnership with Yahoo Finance. When Yahoo Finance brought in Suzy Orman to replace Advice America, the Fremont, Calif.-based company was forced to move away from its initial strategy of focusing on consumers. Today, Advice America makes no attempt at all to reach consumers directly. "I don't see this going to the point where it'll be a consumer only version," says Pierre Bossaert, the company's vice president of financial planning. "We're not going to replace the advisor."
Indeed, one current use of Advice America's retirement software is as a private label retirement application that brand-name financial companies are able to put on their Web sites. Prospective clients can do a little retirement analysis using this lightweight Web version, and if they're intrigued, they can ask for an in-person consultation. "Generally there is a call-to-action so they can contact an advisor or have one contact them," Bossaert says.
At that stage, an advisor uses the full version of the software, which has the capability of helping the client look at different phases of retirement--early retirement, middle retirement and late retirement. Bossaert says that the basic version of Retirement Income Edition is powerful enough to create a suitable plan for 80 percent of clients. In the other 20 percent of cases, the advisor can use the software to make custom recommendations. Advice America's corporate customers include banks like Citibank Investment Services, credit unions such as Boeing's and broker/dealers such as AIG and TDAmeritrade.
The Experts Comment
Analyzing a client's retirement prospects isn't new, but until a few years ago the sophisticated simulations that make that analysis faster and more reliable were mostly the province of big financial institutions.
The emergence of Monte Carlo within applications that are more widely available represents a big opportunity for advisors--but also a big responsibility. "If you don't have the best technology, you are doing your client a huge disservice," says Glenn Kautt, president and chairman of The Monitor Group, a wealth management firm in McLean, Va. He adds that there's no excuse for an advisor not to have the technology, now that it's generally affordable.
Kautt says it's the rare client--and not necessarily the most desirable one--who will feel he can drop his advisor in favor of a an automated "self-service" retirement package. "It will be those with simple needs who have the ability to interact with the program," Kautt says. "The idea that there will be wholesale and universal replacement with Hal from '2001'--it ain't gonna happen."
Consultant Jim Starcev agrees. "The whole thought of planning for retirement is daunting for people," says Starcev, managing principal of Etelligent Consulting in Overland Park, Kan. He notes that in polls (presumably tongue-in-cheek ones whose results are released at advisor conferences), most investors say they would rather clean their bathrooms than work on their retirement plans.
That may make me the exception. Personally, I was so impressed by the software I saw in the course of researching this article, that I've already started to enter some of my information to see how my retirement is looking. But then, I'm a finance MBA who has always had an amateur's interest in this kind of planning--the exception that proves the rule. The rest of my baby boomer friends--not to mention my mother and my kids--would rather be doing just about anything else (bathrooms excluded), which is clearly good news for advisors.
Robert Hertzberg is a New York-based freelance writer and editor.
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